The Commission today launched an in-depth consultation on issues arising in the area of investment funds. The consultation focuses on:

the issue of money market funds and how such funds should be regulated in future;

the fund industry's involvement in securities lending and repurchase (repo) arrangements; and

the fund industry's exposure to certain OTC derivatives that, in future, will be subject to central clearing and the fund industry's approach to investors' redemptions.

The consultation builds on and is complementary to the European Securities and Markets Authority's (ESMA) guidelines on ETF (exchange-traded funds) and other UCITS issues of 25 July. The consultation raises a series of issues and policy options aimed at maintaining investor confidence in money market funds. Issues at the centre of the consultation are the role of money market funds in the management of liquidity for investors, their engagement in the securities lending and repo markets as well as their systemic involvement in the overall financial marketplace. Issues such as the various methods for calculating the net asset value (NAV) for money market funds are also addressed.

An important focus for the consultation is also a UCITS fund manager's employment of so-called efficient portfolio management (EPM) techniques. The use of EPM techniques is widespread and, in the industry's view, they are an essential tool for generating additional revenue for the fund and its investors. EPM includes securities lending and repurchase transactions as well as the management of collateral that is received or granted to secure these transactions. The above-mentioned ESMA guidelines and the Commission's consultation on shadow banking has already raised the general issues that arise in this context and the current consultation aims to deepen the Commission's insight into the potential systemic and investor implications raised by a fund's use of EPM techniques.

Finally, the consultation raises the more long-term policy challenge that arises in the area of investment funds: how to create a European investment culture where retail investors take a longer-term and strategic view when placing their savings with the providers of fund products and have access to products suited to this. This would also include exploring ways for UCITS to participate in social businesses.

Responses to this wide-ranging consultation are invited by 18 October 2012 at the latest.

Background

This targeted consultation is complementary to the Commission's on-going work on shadow banking and the general consultation on this subject launched on 19 March 2012 (see IP/12/253). In light of the responses received to this consultation and further exchanges with stakeholders, the Commission will decide on appropriate follow-up measures.

The current consultation addresses different issues and is separate from the proposals focusing on specific issues of UCITS depositary, remuneration and sanctions which were adopted by the Commission on 3 July 2012 (see IP/12/736).

'Shadow banking' is a general term employed to categorise all entities that engage in maturity transformation without being regulated as banks. The consultation aims to further clarify the interaction between the debate on shadow banking and the role of investment funds.

'UCITS' or 'undertakings for the collective investment in transferable securities' are funds regulated at European Union level. Investment funds that comply with the UCITS rules on, for example, eligible assets, issuer concentration or risk spreading can be sold to professional and retail investors across the European Union.

'Money market funds' are investment vehicles where households, corporate treasurers or insurance companies can obtain a relatively safe and short-term investment for surplus cash. On the supply side, money market funds are important lenders to sovereigns, banks or corporations whose short term debt a money market fund purchases. The systemic implications of potential investor 'runs' on money market funds are a core feature of the international regulatory debate on these investment funds. In Europe, most money market funds are covered by the UCITS rules.